PREMi - Newsletters- June 2010

CLASS ACTION ARBITRATIONS:
HAS THE OBITUARY BEEN WRITTEN?

by Gene J. Esshaki, Esq.

    The decision of the United States Supreme Court in Stolt-Nielsen, S.A., et al. v Animal Feeds International Corp., Docket No. 08-1198, decided April 27, 2010, appears to have put an end to class action arbitrations. This decision will be viewed by advocates of consumer rights as a significant blow to their cause. Corporations providing consumer services and goods, however, will greet this decision with open arms.

    Class actions are a judicially created process in which many claims arising out of a single wrong can be addressed in a single action. The rationale behind class actions is that they save judicial time and resources by resolving in a single action claims that could individually run into the hundreds, thousands and even millions. Instead of 100,000 individual claims being filed in courts throughout the country for a single wrong allegedly committed by a defendant, all the claims are consolidated in a single court and resolved at one time. The Federal Rules of Civil Procedure and the rules of each state court permit potential members of a class to "Opt Out" and, thus, not be bound by the class decision. Thus, they are free to pursue their own rights against the defendant. In most instances, however, the claims are so small that individual plaintiffs will simply not pursue them because the cost of pursuit greatly outweighs the prospect of recovery.

    For example, the local purchaser of monthly cable service who happens to be inadvertently overcharged $1.00 on his service contract every month for 24 months, will not file an independent action against the cable provider because the amount at issue, $24.00 does not justify even the filing fee for the claim, let alone the cost of its prosecution. If, on the other hand, 100,000 cable subscribers have been simultaneously overcharged each month for two years, the amount at issue increases from $24.00 to $2,400.000, justifying the filing fee and a vigorous prosecution of the case. If successful, cable subscribers, while not individually participating in the litigation, will enjoy the benefits of its resolution through a reduction in future cable prices, a refund of fees already paid, or other concessions made by the cable company.

    The question of whether class actions could be brought in an arbitration setting was undecided for a number of years. Since arbitration is a creature of contract, that is, parties agree to submit their disputes to binding resolution before an arbitrator outside the purview of a court, it had been argued that class action arbitration could not occur in the absence of a specific agreement by the contracting parties approving class arbitration as an acceptable procedure for conflict resolution.

    The Supreme Court was squarely faced with the issue of whether class action arbitrations are permissible in a commercial setting in Green Tree Financial Corp. v Bazzle, 539 U.S. 444, (2203). There a fractured Supreme Court issued a plurality decision, at least facially, concluding that class arbitration was not clearly precluded by a commercial lending contract's broad arbitration clause providing that "all disputes ... arising from or related to this contract or the relationships which result ... will be resolved by binding arbitration by one arbitrator selected by (lender ) with consent of you". Two separate class actions had been brought in the lower courts of South Carolina alleging violations of that state's Consumer Protection Code by Green Tree Financial. In each action, the lower court certified the class and then compelled private arbitration pursuant to the parties' agreement. Thereafter , each arbitration award was confirmed by the lower court. The Supreme Court of South Carolina withdrew appeals of the cases from its Court of Appeals, consolidated them and affirmed the decision of the trial courts approving class arbitration.

    Justice Breyer of the United States Supreme Court in a ;plurality decision indicated that the arbitration clause in question did not clearly preclude class arbitration and, thus, the broad public policy favoring arbitration expressed in the Federal Arbitration Act (FAA) did not foreclose class arbitration. Accordingly, the issue was one for resolution under state-law contract interpretation. Three justices concurred with Justice Breyer, and one concurred in the result only, thus the plurality.

    Following the decision in Green Tree Financial, numerous lower courts issued decisions confirming the availability of class arbitration in the absence of a specific reference in the parties' contract establishing the intent of the parties to the contrary. The courts reasoned that because of the long established policy favoring arbitration, the party opposing class arbitration had the burden of establishing that class arbitration was never intended when the parties entered into their arbitration agreement. In the absence of specific language prohibiting class arbitration, the courts concluded that under broadly worded arbitration clauses, such actions are permissible.

    On April 27, 2010, the world of presumed class action arbitrations came to an end. The United States Supreme Court issued its opinion in Stolt-Nielsenwhich concluded that the imposition of class arbitration, in the absence of express agreement by the parties approving it, is inconsistent with the provisions of the Federal Arbitration Act. The five justice majority concluded that the subsequent interpretations of the Green Tree Financial plurality opinion were, in fact, in error and misunderstood the true directions of the Court in that opinion. Instead of concluding that parties are presumed to have agreed to class arbitration in a broad arbitration clause, absent specific evidence of intent to the contrary, the Stolt-Nielsen majority concluded that a party may not be compelled under the FAA to submit to class arbitration unless there is a specific contractual basis for concluding that the party agreed to do so. The Court felt that agreeing to class arbitration is dramatically different than agreeing to bilateral arbitration. This difference is so great, the Court concluded, that it cannot be presumed the parties consented to class arbitration by simply agreeing to submit their disputes to an arbitrator. The Court even addressed the Supplementary Rules for Class Arbitrations adopted by the AAA and indicated that, to the extent the Rules provide that the presumption of privacy and confidentiality that generally applies to bilateral arbitration shall not apply in class arbitrations (Rule 9(a), a basic assumption of the parties at the time of entering into their agreement, confidentiality, would be thwarted under the Class Rules. The Court concluded that the differences between bilateral and class action arbitrations are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties' mere silence on the issue of class action arbitration constitutes consent to resolve their disputes in class proceedings.

    For consumer advocates, the Stolt-Nielsen decision is less than welcome. Many service contracts provide that any and all disputes between the parties must be resolved through arbitration. Where the consumer is overcharged a nominal amount each month for a period of years, the commencement of an arbitration to recover those funds is simply not practical. On the other hand, because the parties have agreed contractually that all disputes must be resolved in arbitration, the courts will uphold that agreement. Accordingly, litigation, including class action proceedings, is out of the question given the "agreement" to arbitrate. Gone is the prospect that in arbitration a class can be formed to address multiple claims of multiple parties arising from the same alleged misconduct.

Gene J. Esshaki is a shareholder in the firm of Abbott, Nicholson, Quilter, Esshaki & Youngblood, P.C., where his civil litigation practice includes commercial transactions, construction, corporate, employment insurance, professional liability securities and shareholder actions.

    The opinions of the author are not necessarily those of other associates of Professional Resolution Experts of Michigan, LLC.

Copyright pending by Professional Resolution Experts of Michigan 2010.